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Overview of Company Takeover

In the era of growing competition, dynamism and technologies, existing businesses face several challenges to sustain their existence. For this, they tend to undergo several structural modifications to strengthen their financial performance and market position. The various growth-oriented strategies used by corporates houses to enter new markets and expand their market base include Merger, Amalgamation, Acquisition and Company Takeover.

In India, company takeover is one of the most preferred growth-oriented strategies. It is a process in which one company acquires control over another by purchasing the majority stake in that company. The company acquiring the majority stake is known as the Bidder or Acquirer, and the company whose control is acquired is known as the Target Company.  

Regulatory Framework for Company Takeover

In India, the legal provisions regulating the Company Takeover are as follows:

  • Section 230 (11) of the Companies Act, 2013: This Section deals with every form of compromise and arrangement.
  • Section 250 (3) of the Companies Act, 2013: As per this section, NCLT has the power to direct any company administrator to take over the assets and management of that company.
  • Section 261 of the Companies Act, 2013: According to this section, NCLT authorises a company administrator to prepare a scheme of rehabilitation and revival, including the takeover of a sick company by a solvent company.
  • SEBI (Substantial Acquisition of Shares and Takeover) Regulation, 2011: The provisions of SEBI govern the process of takeover by a listed company.

Reasons to Choose Company Takeover

The reasons for choosing a Company Takeover can be summarised as:

  • To achieve growth by advanced technologies, market enhancement and product development of the target company;
  • To diversify the existing product line and market of the bidder company by entering into a new market;
  • To increase productivity and profitability of the acquirer company;
  • To increase the market size of the acquirer company.

Types of Company Takeover

The different types of Company Takeover in India are as follows:

  • Reverse Takeover: In Reverse Takeover, a private company decides to acquire a public listed company to become eligible to list its shares at a recognised stock exchange without undergoing the process of Initial Public Offer.
  • Bail-out Takeover: In this, a profit-earning company acquires a sick company to bail it out from the process of liquidation.
  • Friendly Takeover: When the acquirer company takes the consent of the target company before undergoing the process of Takeover, it is known as the Friendly Takeover. Therefore, it is a process where both the parties mutually agree to the terms and conditions of a takeover.
  • Hostile Takeover: This takeover is opposite to a friendly takeover. In this, the acquirer company does not obtain any prior consent of the target company and forcefully pursues the process of takeover.
  • Backflip Takeover: In Backflip Takeover, an acquirer company decides to become the subsidiary of the target company.

Company Takeover Checklist

The steps involved in the process of evaluating a decision for Takeover are as follows:

  • Planning: An acquirer company needs to first analyse the industry by reviewing the overall objective of takeover in context of the strength, opportunities, weakness and threats (SWOT). It also involves going through other factors like management quality, capital structure and market size. before Company Takeover.
  • Screening of Candidates: The company needs to search and short-list the suitable candidates for takeover by taking into consideration, all the relevant factors mentioned above.
  • Financial Evaluation: The points to be considered while evaluating the financial health of a company are as follows:
  1. Cash flows;
  2. Maximum price payable for takeover;
  3. Method to finance the Takeover.

Advantages of Company Takeover

The advantages of Company Takeover are as follows:

  • Increase in Business Size: Takeover is the best way for a company to expand its business operation in a short duration.
  • Reduce Competition: When a bidder company acquires the controlling stake in a target company, it directly reduces the competition in the market.
  • Tax Benefits: In a company takeover, the losses incurred by an acquirer company are set-off against the profits of a target company, thereby reducing the net taxable income.

Difference between Merger and Company Takeover

Point of Difference

Merger

Company Takeover

Definition

When two or more companies mutually decide to combine and form a new company, it is known as Merger. Therefore, the process of merger means consolation of multiple businesses into one.

It is the legal act where one company acquires another company & becomes its new owner.

Dissolution

In Merger, both the companies dissolve to structure a new company.

The target company automatically gets dissolved when it gets acquired by the acquirer company.

Shareholding

The shareholding of both the companies are surrendered and fresh shares of the new company are issued to the shareholders.

Shares of the target company are transferred to the bidder company.

Size of the companies

In the process of merger, both the companies are comparatively of the same size and structure.

A profit-earning company takes over a sick company and becomes the owner of the formed company.

Types

The types of mergers are Vertical, Horizontal, Conglomerate, Co-centric, Forward, Cash and Backward Merger.

The types of takeovers are Bail-out, Friendly, Hostile, Reverse and Backflip.

 

Difference between Company Takeover and Acquisition

Acquisition

Company Takeover

An acquisition is similar to a company takeover as in both the cases, one company acquires the other. However, an acquisition is carried out in a pre-planned manner in which both the companies mutually agree.

In a Company takeover, a bidder company acquires the major controlling stake in the target company.

Acquisition is a pre-planned operation.

Company Takeover is a Hostile Act.

Acquisition is based on the concept of a mutual decision.

Company takeover is not based on the concept of a mutual decision.

 

Strategies of Company Takeover

In India, the different types of strategies that can be followed by the companies are as follows:

  • Casual Pass: In this strategy, the acquirer company normally contacts the Target Company through a formal inquiry or intermediary. If the Target Company rejects the initial offer, the acquirer company can either to choose to walk away or adopt a friendly approach. It can also adopt more aggressive strategies of taking over the Target Company.
  • Bear Hug: According to this, the Acquirer Company offers to purchase the shares of a Target Company at a price higher than the market price.
  • Tender Offer: In a tender offer, a bidder makes an offer to the public in the form of an invitation or open letter, or by publishing in a newspaper or through advertisement to the shareholders of the public companies to sell their shares at a prescribed time and price.
  • Proxy Fights: In this, the acquirer company forces the shareholders of the target company to either agree or gather proxies to win the corporate vote. According to this method, shareholders of the target company vote out the management for making the process of takeover easier.
  • Stock Repurchase: This strategy is also known as the Self Tender Offer in which the target company repurchases its shares from the shareholders. This technique is one of the most effective Anti-Takeover Strategies.

Procedure for Company Takeover

After completing the steps involved in the company takeover checklist, an acquirer company can proceed further with the process of Company Takeover in India. The process of company takeover can be summarised as:

  • Board Resolution: The directors of an acquirer company need to pass a board resolution to approve Bidding for the shares of a target company.
  • Application to the Commission: The company needs to apply with the commission by filing an application for the approval of takeover bid. The company files the application together with the following attachments:
  1. Takeover Bid;
  2. Information Memorandum;
  3. NOC (No Objection Certificate) from the relevant government authority.
  • Registration of the Proposed Bid: After receiving the approval, the acquirer company needs to file an application to register the proposed bid again with the commission.
  • Takeover Bid: After obtaining the registration, the acquirer company can proceed further with the takeover bid by sending it to the target company.
  • Hold a Board Meeting: After receiving the takeover bid, the target company holds a board meeting and accepts that 90% of its shares are subject to acquisition.
  • Filing of the Report of Takeover: Once the process of Takeover is complete, the acquirer company files a report of takeover within seven days of the conclusion of Takeover to the commission.

Consideration of Company Takeover

The term ‘consideration’ refers to the amount paid for the acquisition of the target company. The different forms of paying consideration are as follows:

  • In the form of Cash: When the acquirer company pays the consideration for the shares acquired in the form of cash to the target company.
  • In the Form of Shares: When the acquirer company decide to allot its shares to shareholders of the target company in proportion to their previous shareholding.
  • By Forming a New Company: An acquirer company can form a new company by acquiring shares of the target company. After that, shareholders of both the companies are allotted shares of the newly structured company.
  • By Acquiring Minority Shares: An acquirer company can plan to acquire at least 50% of the shares of the Target Company.

Package Inclusions:

  • Assistance in taking Approval from Commission;
  • Preparation of necessary Documents and Signatures on Commission;
  • Preparation of the Agreement related to Company Takeover;
  • Strategic Planning of the entire Takeover of Company;
  • Compliance with all the laws and regulations applicable to Company Takeover.

FAQs for Company Takeover

The following listed are the steps included in the procedure to take over a company in India

  • Determining the market – the below-listed data is used to analyze the market situation
  1. Client origin
  2. Population
  3. Population age group
  4. Prevailing employment rate in the market
  5. Competitors and alternate source for the concerned product or service
  6. Competitive cost
  7. Consumer preferences
  • Identification of candidates
  • Evaluation of financial position
  • Take the final decision
  • Assessing the value of the market – the listed below are the methods which can be used for assessing the market value –
  1. Discounted cash flow method
  2. Comparable transaction method
  3. Comparable publicly traded company method
  • Due diligence
  • Implementing Takeover

A hostile takeover is a type of forced takeover in which the acquirer company acquires the target company. In simple terms, management of the target company is reluctant to agree for the merger or is unwilling to any merger for takeover. Further, a takeover is recognized as Hostile if the board members of the target company rejects the offer, but the concerned bidder continues to pursue it.

Takeover is a process similar to a merger. This process involves two companies of different size and structure as most large company takeovers smaller companies. Further, if the company follows the opportunistic takeover, then it can get the fair value in the long run. Whereas on the other hand, companies also enter into a strategic takeover wherein the company gets a chance to enter into a new market that too very less amount of money, time, and investment involved.

Takeover

Acquisition

A Takeover is generally a hostile act, where the acquirer will surpass the target company’s board of directors and will purchase more than 50 percent of the shares to obtain a controlling stake in the firm.

An acquisition is quite parallel to a takeover in that one company will acquire the other; however, usually on a pre-planned and orderly in the manner in which both parties strongly agree if beneficial to both firms.

The following listed are the three broad types of takeover

  • Friendly Takeover
  • Hostile Takeover
  • Bailout Takeover

Although many takeovers may be considered as unethical, but a hostile takeover is definitely not unethical by itself. Further, the concept of hostility often comes from the management and not the shareholders. Furthermore, if in case the state laws and regulations heavily circumscribed and not quite neutral, then, in that case, the hostile takeover is a significant method for getting rid of incompetent, ineffectual, even corrupt management.

The target company in a hostile takeover bid usually experiences a rise in the shares of its stock price. As the acquiring company makes a proposal to the shareholders of the target company, enticing them with incentives in order to approve the takeover. Further, a tender offer is a bid to acquire the stock shares of the said target company at a premium to the market price of the stock.

The following listed are the points that are to be considered for surviving a corporate takeover

  • Plan for the worst situation
  • Plan for the best situation
  • Prepare your elevator pitch
  • Let the executive team know that you are prepared
  • Update all your technical information and documentation

In business, changing hands signifies a change in the company’s ownership. This means that the founder of the said company may decide to sell off the company and retire. Normally, a smaller company is acquired by a larger one that has the belief that when the two are combined, they will be a more daunting competitor in the marketplace. Further. the change in ownership may bring other significant changes to the organization as well that will affect the vendors, employees, and customers.

The following listed are the regulations that are governing the concept of takeover

  • Section 230 (11) of companies act, 2013
  • SEBI (substantial acquisition of shares and takeover) regulation, 2011
  • Section 250 (3) of the companies act, 2013
  • Section 261 of the companies act, 2013

The following listed are the types of takeover

  • Friendly takeover
  • Hostile takeover
  1. Tender offer
  2. Proxy fight
  3. Creeping offer
  • Reverse takeover
  • Backflip takeover

A takeover bid is a kind of corporate action in which a company makes an offer to acquire another corporation. Further, in a takeover bid, the company which is making an offer is known as the acquirer company, whereas the subject of the takeover bid is recognized as the target company.

 

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